Question

Amy, a single individual and sole shareholder of Brown Corporation, sold all of the Brown stock for $30,000. Amy's stock basis was $150,000. She had owned the stock for 3 years. Brown Corporation meets the Section 1244 requirements. 1) How much of an ordinary loss does Amy have? 2) How much of a capital loss does Amy have? 3) Do your answers above change if Amy is married? Explain how.

Answer 1

Part 1)

The value of ordinary loss is determined as below:

Total Loss Realized = Sales Value of Stock - Stock Basis = 30,000 - 150,000 = -$120,000

As per the applicable rules, a loss on Section 1244 stock is deductible as an ordinary loss upto a maximum value of $50,000. Therefore, out of $120,000, $50,000 will get treated as ordinary loss in this case.

Ordinary Loss = $50,000

Answer for Part 1) is $50,000.

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Part 2)

The amount of capital loss will be the difference between the total loss realized and ordinary loss as per Section 1244. The value of capital loss is arrived as below:

Long Term Capital Loss = Total Amount Realized - Ordinary Loss = 120,000 - 50,000 = $70,000 [as the stock has been held for more than 12 months, the loss will be treated as long term capital loss]

Answer for Part 2) is $70,000.

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Part 3)

If Amy is married, the amount of loss on Section 1244 stock deductible as ordinary loss will increase from $50,000 to $100,000. The value of ordinary loss and capital loss is determined as below:

Ordinary Loss = $100,000 (as per applicable rules)

Long Term Capital Loss = Total Amount Realized - Ordinary Loss = 120,000 - 100,000 = $20,000

Answer for Part 3) is $100,000 (Ordinary Loss) and $20,000 (Long Term Capital Loss).